Bank of England (BoE) governor Andrew Bailey has hinted that UK interest rates may be increased less aggressively amid fears the UK may fall into recession if they are hiked too far.
Speaking at the sidelines of the World Bank and IMF spring meetings in Washington on Thursday, he said the Bank was walking a fine line between combating inflation and avoiding recession.
Bailey also raised concerns about the risks of persistent inflationary pressure from a strong labour market, with rising wages causing higher inflation for longer.
"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," he said at the Peterson Institute for International Economics.
Although officials have started to tone down their language on the need for more rate hikes, he did point to another increase next month.
Michael Hewson, chief market analyst at CMC Markets UK, said: “Bank of England governor Andrew Bailey also played a straight bat, but he did give the impression that another rate rise was coming in May, given concerns about how inflation was starting to bed in.
“However he didn’t have the air of a man ready to give a strong steer on a 50bps move, although he did acknowledge the tightness of the labour market, where we are quite likely to see further welcome upward pressure on wages in the months ahead.”
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Markets are betting that the central bank will raise interest rates again in two weeks’ time for the fourth time since the start of the pandemic.
The BoE has already raised interest rates three times since December, more than any other minor central bank. Traders believe Threadneedle Street is looking to move rates from the current 0.75% level to 2.5% by this time next year.
It comes as consumer price inflation hit 7% in March, more than three times higher than the BoE's 2% target, with energy bills and fuel costs largely behind the rise. March’s reading was a fresh 30-year high, topping the record set in February.
Earlier on Thursday, BoE rate-setter Catherine Mann warned that soaring energy and food prices will persist next year, even if consumer demand weakens.
The former Citigroup economist highlighted that the central bank must calm inflation expectations, which were likely to drive demands for higher wages, pushing inflation even higher.
“The domestic inflation ratchet has been my central concern,” she said. “Monetary policy needs to keep inflation expectations anchored; by doing so now, less tightening will be required later, when demand may still be weak.”
The Bank's Monetary Policy Committee (MPC) will next meet on 5 May to decide on interest rates.
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